What does "vesting" refer to in terms of a retirement plan?

Vesting in the context of a retirement plan primarily refers to the process of earning ownership rights to employer contributions made to an employee's retirement account over time. When an employer makes contributions to a retirement plan, such as a 401(k), those funds might not belong to the employee immediately. Instead, vesting determines how much of those contributions the employee can claim as their own if they leave the company.

Typically, a vesting schedule is put in place, which could require employees to work for a set number of years before they gain full ownership of the employer contributions. This serves to encourage employee retention and loyalty.

Understanding vesting is crucial for employees as it impacts their financial planning and benefits when changing jobs or retiring, highlighting the importance of knowing one’s rights to employer contributions within a retirement plan.